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Pharoah Corp. enters into a contract with a customer to build an apartment building for $1,045,500. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $139,800 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $46,600 each week that completion is delayed. Pharoah commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability
August 1, 2021 70%
August 8, 2021 20
August 15, 2021 5
After August 15, 2021 5
Required:
Determine the transaction price for the contract, assuming Nair is only able to estimate whether the building can be completed by August 1, 2021, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2021).
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